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In general terms, this is one of the most frequent questions we get from prospective clients. So then, How do you file U.S. tax returns while in Canada?

The first question we need to ask is whether you are actually required to file U.S. tax returns. Generally speaking, U.S. citizens and Green Card holders are required to file U.S. tax returns regardless of where they live. Therefore Americans living in Canada, whether they have recently moved to Canada, or have been in the country their entire lives, are required to file U.S. tax returns, in addition to their regular Canadian tax returns.

Once you have established that you are required to file U.S. tax returns, the next step will be to assess your actual filing requirements.

What forms need to be filed?

Assuming you are above the required income filing threshold, you will need to complete form 1040 for the current year. The 1040 is the general income tax form, and is really only 2 pages long. The bulk of your annual U.S. income tax filings will be comprised of additional forms and schedules.

What other tax schedules need to be filed?

Outlined below is a list of general forms that may be required. Note that these forms are not always required, and additional forms could be required, based on your particular tax situation:

Form 1040 – As discussed above.

Schedule AItemized Deductions: In most cases, especially for U.S. taxpayers in Canada, schedule A will not be required, either because they may not need to itemize, or simply because they have paid enough Canadian taxes to reduce any U.S. taxes owing via Form 1116 – Foreign Tax Credits (see below).

Schedule B Interest and Dividends: Schedule B reports interest and dividends from all worldwide sources. Note that Schedule B has some important questions related to FBARs and foreign trusts that need to be accurately answered. See more below.

Schedule CProfit or Loss from Business: Schedule C reports business activities. For those in Canada remember that Self-Employment (SE) tax otherwise payable on net business profits would be exempted.

Schedule DReporting of capital gains and losses: Both gains/losses from Canadian and U.S. sources need to be reported on Schedule D. Canadian security sales need to be converted at their original purchase dates and respective sale dates as well.

Schedule ESupplemental income and loss: In most cases, Schedule E reports profits and losses from rental activities, however, you will also use this schedule to report royalties earned. Note that special depreciation rules apply to rental properties owned by U.S. citizens. For example, unlike Capital Cost Allowance (CCA) for Canadian purposes, depreciation is mandatory in the U.S.

Schedule F – Profits and losses from farming activities.

Are any other tax forms or disclosures required?

Form 8965Health Coverage Exemption: If you live in Canada, and are covered by universal health care, you should be exempt from any additional U.S. health premium taxes.

SE Tax Exemption – If you reside in Canada, and are exempted by the Canada-U.S. social security agreement, a disclosure to this affect will need to be filed with the 1040.

Form 1116Foreign tax credit: As you will be reporting your worldwide income on both your Canadian and U.S. tax return each year, you will need to ensure that you do not pay both Canadian and U.S. taxes on the same income. You can claim all the Canadian taxes you have paid on the income reported to the U.S. on Form 1116. Note that Form 1116 is completed separately for general (employment, business, pension, etc.), passive (interest, dividends and capital gains) and resourced (income only taxable in Canada) income. In many cases, you will have several 1116 forms in addition to Form 1116 AMT, if applicable.

Form 2555Foreign earned income: Instead of using Form 1116 to reduce U.S. calculated taxes on Canadian income, you can also fully exempt Canadian earned income (employment and business) via Form 2555. For 2015, you will be able to exempt up to $100,800 of earned income from your U.S. tax return.

Form 8812Child tax credit: You will need to be careful about claiming this credit if you live in Canada. Technically speaking this credit is only available to taxpayers that have a dependent, that is also a U.S. citizen or resident.

Form 8960Net Investment Income Tax (NIIT): Commonly referred to as Obamacare tax, NIIT is additional tax on investment income for taxpayers who exceed a certain income threshold. The threshold for filing status “Married filing jointly”, “Married filing separately” and “Single” are $250,000, $125,000, and $200,000, respectively. Any investment income earned above this threshold will result in an additional tax of 3.8% on this income. Note that foreign tax credits from form 1116 will not be available to reduce this tax, however, NIIT on U.S. source income may be claimed as foreign taxes for Canadian foreign tax credit calculations.

Form 8938Statement of specific foreign financial assets: This form, similar to the FBAR form below, reports specific foreign financial accounts held by the U.S. taxpayer. Unlike the FBAR, however, the filing threshold is much higher, and the reporting also includes accounts such as foreign pensions and life insurance policies.

Form 5471Report of controlled foreign corporations: This form will be relevant to Americans with incorporated businesses in Canada. These businesses are considered “foreign” for U.S. tax purposes and therefore require Form 5471 to be filed.  The form reports the balance sheet, income statement, and equity statement of the company throughout the year, converted to U.S. dollars.

The form also serves to calculate income that is not eligible to be deferred for U.S. tax purposes. Under U.S. tax law, an individual is not able to defer investment income (and some other specific types of income) within a foreign corporation. This income inclusion is outlined under Subpart F of the U.S. tax code. In essence, any investment income earned in a Canadian company controlled by a U.S. taxpayer needs to be taxed on their personal tax return, regardless of whether they distributed this income within the current period.  Specific tax planning is necessary to ensure adverse tax consequences do not result from Subpart F income inclusions.

Form 3520/3520-A – These forms may be required if you are the owner, trustee, or beneficiary of a foreign trust (including Canadian trusts). These forms may also be required if you are gifted more than $100,000 from a non-resident alien of the U.S.

Do I need to file any Canada-U.S. Treaty Elections?

The Canada-U.S. tax treaty contains articles that outline how specific types of income are treated for tax purposes between both countries. Often, in order to take advantage of some of the exemptions in the treaty timely treaty elections need to be filed.

Note that these elections are filed using form 8833 Treaty based return position disclosure and late filing of form 8833 can lead to additional penalties. Specific treaty elections are beyond the scope of this article, however if you have specific questions about treaty elections please leave a comment below.

Do I Need to File FBARs (Form 114)

American taxpayers that own foreign bank or investment accounts are subject to Form 114 filing requirements. If the aggregate total “highest balance” in all your foreign financial accounts exceeds $10,000 in the year, you are required to file FBAR forms. As noted above, you will be asked this question on Schedule B. Form 114 is now filed electronically, and can be downloaded and submitted here.

When are my tax returns due?

Your U.S. tax return and payment are due April 15th, however, if you are out of the U.S. on the filing date (which will be the case for most Americans in Canada), your due date is extended to June 15th. Unless you are self-employed, the due date of your Canadian tax return is April 30th. Whenever possible, it is best to file both returns by April 30th.

Are there any penalties for late filing U.S. tax returns?

There are potential penalties for late filing of tax returns and forms, as well as for underpayment of tax. There is a penalty of 5% of unpaid taxes by the due date of the return, up to a maximum of 25%.

There are also penalties for specific forms that may be filed late. For example, Form 114 has a penalty of $10,000 per unreported account, to a maximum of 50% of the highest balance in all the accounts for that specific year. Also, foreign reporting forms such as Form 5471 (Controlled Foreign Corporation Reporting) carry a late filing penalty of $10,000 per year.

Other penalties include accuracy related penalties, unpaid withholding tax penalties, and fraud penalties, to mention a few.

Does the IRS send Notice of Assessments similar to CRA?

No, unfortunately the IRS does not issue automatic filing receipts once the tax returns have been assessed. You can however request a transcript of you U.S. tax return here.

I need help in filing my U.S. tax return? Can you help?

Definitely, we can help you in advising on U.S. tax and cross border issues, as well as the preparation of your U.S. and Canadian tax returns. For more information on how I can help. please email me at phil@hutcheson.ca or call me at 250-381-2400.

 

18 Responses to “How to File US Tax Returns in Canada?”

  1. Diane says:

    I am an American who made a *very modest income from one employer in 2016. I am married (to a Canadian) and have a Canadian bank account. I feel very confused about all the different filing schedules involved with the 1040 form.
    I’m guessing I don’t list my income from my T4 where you would put your W2 wages…this is all very confusing.
    Thank you in advance for any help…this is a very complicated process for such a simple income level.

    Cheers!

  2. EH says:

    The US-Canada tax treaty stated that full-ear residents of Canada owe normal wage and dividend income to the CRA. Logically, it would seem that taxes should be filed with the CRA, which shares info with the IRS besides. Some people in this situation just file Schedule D every year without 1040 with the IRS I’m told by a tax preparer in the U.S. Technically they “filed”, just not a whole return. There’s no version of 1040 for expats in countries with treaties allocating any of the types of income that taxpayer earned to that country. If a taxpayer files 1040 saying they had income, and don’t pay it because they paid the CRA, isn’t there a risk the IRS will get confused and think you owe the IRS? Is a cover letter filed with 1040 sufficient to avert owing, or should the foreign tax credit be applied instead as though there were no treaty? Do treaty elections need to be made on a form and can that be filed with an amended return?

    I asked the IRS to make a written statement on this matter and they kept sending letters saying they need 45 more days. For 2 tax years I sent Schedule D only and have received no letters indicating this was insufficient to be in compliance. I’ve kept my Canadian address updated with the IRS.

  3. Allen Morgan says:

    1.) Can I eFile form 1040?
    2.) Can I efile FBAR forms?

  4. THOMAS KOREMAN says:

    Do I file the Canadian tax return first and then file the 1040?
    How much do you charge for a U.S. person living in Canada to do
    their U.S. tax return? They earn $24,000 management fees per year.
    2012 income was nil.
    2013 income was nil.
    2014 income is $24,000.
    2015 income is $24,000.
    2016 income is $24,000.
    He is married and living in Canada.
    The spouse is a Canadian doctor.

  5. Mike says:

    I am a non-resident alien of United States – 100% Canadian – I signed a entry level hockey contract ( American team) and received a signing bonus in 2016 ; I was not paid for any other services in the United States – I do not have a SSN or green card – do I have to file a US return?

  6. Michelle says:

    Hi Phil, I was wondering if you could offer some guidance please. I’m a Canadian who won a small jackpot in Las Vegas where of course, they withheld 40% of my winnings. It equates to close to $400 – so trying to determine the best way to maximize what the US Government will “give me back”. Any help is very much appreciated. Thank you in advance.

  7. Michelle says:

    Hi Phil,

    My husband is a US Citizen, living in Calgary for over 15 years as a permanent resident, and filing Canadian tax returns for his Canadian income.

    In 2016, in addition to his self-employment income in Canada, he also earned US income that he has on a W2 and also on a 1099-MISC as he spent 6 months in the US.

    He is reporting this income on a US tax return and will be paying US taxes on it. Does he also have to report it on his Canadian tax return given that he’s a US Citizen, with US Source income, and paying US taxes on it?

    Many thanks,
    Michelle

  8. Kathy Millard says:

    Hello
    I moved from the US to Canada 09/2010 (filing my US returns only for that year). I did not work in Canada until 2/2013 (I had to wait for my permanent resident was approved). This year, I just recently found out I had to file both a US and Canada tax return.

    What is the best way to file now? I would need to file 2013, 2014, 2015 and 2016 (I filed a Canadian tax return all those years).

    Hoping that you can help me.

    Thanks

    Kathy

  9. Kat Spencer says:

    Hi Phil,

    I am attempting to file my American return on my own this year however there are no directions available regarding how to align my T4’s and W2 values. I’ve looked at all my old taxes and can’t seem to line the numbers up event when incorporating exchange rates at the time. I only have one T4 and my previous accountant charged $550 for this. Advice?

  10. Ima Rez says:

    Hello , I’m Canadian artist and travel to US for performing my music show , my promoters paying after they deduct 30 % us tax and 10% commission wire me the rest and other travel expenses manage by my Canadian promoters ans orgnizer ,need all step to do taxes and as Canadian to do this for us I m having p2 performing permission and EIN number that’s all
    Appreciated any help
    Ima Rez

  11. Tim says:

    Hi Phil,

    I am a Canadian citizen who moved back to Canada in August. I had spent the last four years in the USA, 2 as a student and 2 working under the TN visa. Do I need to include the income I earned in Canada after my return in August on my USA tax return?

    Thanks,
    Tim

  12. Stephanie Ayon says:

    I live here in Edmonton Alberta since 2013, I am currently a Permanent Resident now since 2015. I am an American Citizen. I moved here because my mother passed away in 2013, i now live with my father. I only worked for my mother as her Caregiver since 2007 to 2012, five years. I never filed Tax Returns in the US. I am also planning to be a dual citizen in the near future and I want to know how to file US tax.
    I want you advice!
    Thank you!

  13. Hello, I am a canadian who is partner in an american LLC. Doing my work virtually from my home in Saskatchewan. This LLC is just starting, this is the 2nd year…I am also self-employed and generated revenue in Canada. I believe I need to file a return in US (Maryland) and file a return in Canada (no question on that). How do the two filing coincide? or do they?

  14. Henry P says:

    Hi Ben,

    I’m a Canadian citizen and have recently got a US Green Card. I’ve a job in Canada and have been filing my return. I plan to take a re-entry permit for US, as I’m not yet planned to move to US. In the mean time, I understand that I’ve file my tax returns in US as well. What’s your advice?

    Thanks,

  15. Jerry_c says:

    I live in Vancouver and have been getting my US tax returns prepared by a local CGA. He doesn’t charge much, but I’m concerned that he’s not as knowledgeable as he should be on these matters. I questioned by about the FBAR form and he said it wasn’t something to worry about. After reading about the penalties I’m starting to get worried.

    What should I do??

    J

    • Phil HoganPhil Hogan says:

      Hi Jerry

      I definitely wouldn’t agree that not filing FBARs is something not to worry about. If you haven’t filed prior year FBARs you may have some options for catching up these information returns.

      Please give me a call at 250-381-2400 and we can run through your options.

      Thanks

      Phil

  16. Ben says:

    Hi Phil

    I’m a doctor that recently moved from California to practice in Victoria. Most of the MDs up here are incorporated. Considering I need to file both in Canada and the US should I consider incorporation?

    I’ll also need help with my 2015 US/canada tax filings along with my wife and 2 kids.

    Thanks
    Ben

    • Phil HoganPhil Hogan says:

      Hi Ben

      Thanks for reaching out. The choice to incorporate will depend on several factors, however it’s often an efficient way to earn professional income.

      If you have the ability to defer or split income with a spouse the savings could be significant. We would however need to review both the Canadian and US tax implications of such a structure.

      Can you give me a call in the office at 250-381-2400 and we can chat.

      Thanks

      Phil

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